Government and Manufacturing & Technology

BULLS & BEARS: Americans' lack of savings shouldn't be misconstrued

March 7, 2005

One trait Americans have perfected is fretting. We are the most anxious of all cultures at a time when our prosperity is at its peak.

According to the Federal Reserve Board's flow of funds accounts, Americans' household assets and net worth are at alltime highs, home ownership and homeowners' equity are at all-time highs, and we have more money in the bank and money-market funds than we've ever had.

Still, we are popping anti-depressants like popcorn.

Even after all the clamor over jobs going to China and India, and Ross Perot's "giant sucking sound" of jobs going to Mexico because of the North American Free Trade Agreement, industrial production and factory shipments in the United States are at an all-time high.

In spite of a decline in manufacturing jobs in the United States, there are more folks employed than ever before. So what's the big worry now? We are told, repeatedly, that Americans don't save any money.

In the next few months, and probably years, you will hear the worrying reach a fever pitch over the lack of savings by Americans. The murmuring started long ago, but soon the volume will really crank up.

The savings rate was in the low single digits a few years ago, slipped below 1 percent in the last year or so, and according to investment strategist Ed Yardeni, will probably drop to a negative number soon and stay negative for quite some time.

I can see it now. Senators will be setting up "task forces," hearings will be held, news anchors with furrowed brows will be telling you how Americans are spending themselves into oblivion, and St. John's Wort will be flying off the shelves.

One reason the savings rate is low is how the number is calculated. It's goofy. Contributions to company pension plans are counted as savings, which they should be. However, payouts to retirees offset those contributions and count against savings.

The oldest baby boomers are turning 60 this year, and for the next few years, the pension payouts will get bigger and bigger and bigger, all the while pension contributions will get smaller and smaller and smaller.

More money has been flowing out of pension plans than into them for a while. It began in 1984, which coincidentally was the year the decline in the savings rate started.

When a person retires, he often gets a large distribution from his company plan and rolls it over into his own individual retirement account. Usually that rollover is the biggest check he has ever been given. For many, it is the lion's share of their life savings.

Since you and your employer have been socking away money monthly into the retirement plan, you consider that big check savings, but the government doesn't.

Secondly, if you are an entrepreneur and build up a business that then can be sold, that is not considered savings either. In this era of downsizing, there are more privately owned businesses than ever, and many of them have a lot of value.

This explains why net worths are high while savings rates are low.

I'm certainly not saying that people shouldn't be concerned about their personal savings rate. It's a good idea to save more, but just because statistical data is flawed is no reason to get all wound up, nervous and depressed.



David Sheaff Gilreath is co-owner of Sheaff Brock Investment Advisors LLC, a money management firm specializing in separate account management throughout the Midwest. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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